Learning Outcomes
This article explains the role of GIPS verification and performance presentation in the CFA Level I curriculum, focusing on what candidates must be able to recall, interpret, and apply in exam-style scenarios. It clarifies the objectives of GIPS verification, the parties involved, and the scope and limitations of the verifier’s opinion at the firm level. It distinguishes, in precise exam terms, between a firm-wide GIPS verification and a composite-level performance examination, highlighting how each engagement is described and what each does—and does not—validate. It details the minimum GIPS requirements for constructing composites, calculating returns, and preparing compliant presentations, including key disclosure items, treatment of terminated accounts, presentation of risk and performance statistics, and statements regarding verification status. It outlines the responsibilities of firms that claim GIPS compliance, emphasizing acceptable and unacceptable verification claims, proper use of "GIPS-compliant" and "GIPS-verified" language, and the continuing obligation to maintain appropriate policies, procedures, and internal controls. It also reviews how verification and compliant presentations support fair representation and full disclosure, enabling consistent, transparent performance reporting that can be compared across firms and strategies in an exam context.
CFA Level 1 Syllabus
For the CFA Level 1 exam, you are expected to understand the significance and objectives of the GIPS standards in promoting fair representation and full disclosure, as well as the critical procedures for verification and compliant performance presentation, with a focus on the following syllabus points:
- The concept, scope, and objectives of GIPS verification
- The roles and responsibilities of firms and verifiers in the verification process
- The distinction between verification and performance examinations
- The minimum requirements and recommendations for GIPS-compliant performance presentation
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the purpose of GIPS verification, and who conducts it?
- What is the difference between a GIPS verification and a performance examination?
- Which key components must be included in a GIPS-compliant performance presentation?
- True or False: Firms are required to have their performance independently verified in order to claim GIPS compliance.
Introduction
The Global Investment Performance Standards (GIPS) were established to address the need for consistent, transparent, and comparable reporting of investment performance. GIPS verification and compliant performance presentation provide investors and stakeholders with confidence in the accuracy and reliability of reported results. Knowing the requirements for verification and the structure of compliant presentations is essential for firms seeking to claim GIPS compliance.
Key Term: GIPS verification
A process by which an independent third-party assesses whether a firm has complied with all GIPS composite construction, calculation, and reporting requirements on a firm-wide basis.Key Term: GIPS performance examination
An independent review that tests whether a specific composite or pooled fund's performance, as presented, complies with GIPS standards.Key Term: compliant presentation
A standardized performance report that adheres to GIPS requirements, enabling fair comparison between firms and across composites.
GIPS Verification Overview
Verification is a voluntary but important process for investment firms that claim compliance with the GIPS standards. The goal of verification is to increase credibility and provide assurance to prospective and existing clients that the firm's performance policies and procedures are robust, standardised, and applied consistently. Verification reinforces a commitment to fair representation and full disclosure and signals the firm's culture of transparency and governance to the marketplace.
Verification is conducted by an independent, qualified third party—never internally—using a defined methodology and scope prescribed by the GIPS standards. Verification does not focus on a single composite or product, but rather evaluates the firm’s GIPS compliance policies and implementation at the entity-wide level.
Distinction: Verification vs Performance Examination
GIPS verification differs from a performance examination. Verification provides an opinion on whether the firm, as a whole, complies with all composite and presentation requirements of GIPS, while a performance examination assesses the correctness of a particular composite or pooled fund’s performance, as presented. Verification is always at the firm level, while performance examinations are optional and can be provided for specific composites or funds. Neither process is required for GIPS compliance, but both may be observed by candidates in ethical performance reporting practice.
Worked Example 1.1
A fund manager has designed a proprietary performance reporting system that he claims satisfies all GIPS presentation requirements. He asks the firm's internal audit function to "verify" that compliance has been achieved and begins using the label "GIPS Verified" in marketing materials.
Answer:
To be valid, GIPS verification must be conducted by an independent external verifier, not internal staff. The internal audit cannot provide GIPS verification. Using "GIPS Verified" without an independent third-party review misleads clients and violates GIPS standards and the CFA Institute Code of Ethics and Standards of Professional Conduct.
The Verification Process
Verification reviews the following:
- Whether the firm defines itself and its composites in accordance with GIPS
- Whether all discretionary, fee-paying, actual client accounts are included in at least one composite
- Whether the firm’s policies and procedures for composite construction, performance calculation, and reporting meet all applicable GIPS requirements
- Whether the compliant presentations for each composite meet minimum GIPS presentation requirements
The verifier must document the procedures performed and the evidence reviewed. Upon completion, if the firm meets all criteria, the verifier issues a verification report stating that the firm is compliant with GIPS for the defined period.
Worked Example 1.2
During a GIPS verification, the verifier observes that a firm's policy excludes terminated accounts from certain composites, resulting in higher reported performance. The presentations appear otherwise compliant.
Answer:
GIPS requires terminated portfolios to remain in composites through the last full measurement period they were under management. Excluding terminated accounts violates GIPS composite construction and presentation requirements. The verifier should not issue a GIPS verification for the firm until the situation is corrected.
Exam Warning
Verifiers provide assurance on compliance with GIPS standards at the firm level only; they do not guarantee the accuracy of reported performance for any single composite unless a separate performance examination is performed.
Performance Presentation and Compliant Presentations
GIPS requires firms to present performance information in a GIPS-compliant presentation for each composite and, where relevant, for each pooled fund. The presentation must include:
- A description of the firm
- Description of the composite or pooled fund, including investment mandate
- Requirements for calculation and reporting of returns (e.g., time-weighted rate of return, net and gross of fees, benchmarks)
- Required disclosures, including all relevant compliance statements and footnotes
- The period for which returns are presented, including annual and cumulative figures
- Measures of risk (such as standard deviation) and assets under management for the composite
- The verification status, if applicable, must be reported clearly (e.g., "This firm has been verified for the period January 2018 to December 2022.")
The compliant presentation is the central instrument for transparent, comparable, and fair reporting. Firms must offer current and prospective clients a compliant presentation for each composite relevant to their mandate or interests.
Key Term: compliant presentation
A GIPS-compliant, standardized performance report for a composite or pooled fund, including all required data and disclosures, allowing users to compare performance across firms and products.
The Role of Verification in the GIPS Ecosystem
Verification is not required but is strongly recommended, as it:
- Demonstrates the firm's commitment to industry best practice
- Strengthens internal controls and consistency in performance reporting
- Increases credibility and trust with prospective clients and regulators
- May be required by certain institutional clients or in specific RFPs
Verification does not relieve firms of their responsibility for compliance nor is it a substitute for a firm's own policies, controls, and regular training on GIPS requirements.
Revision Tip
If a question asks about making claims of GIPS verification, remember: only independent external verifiers may perform verification, and firms must not state or imply that verification applies to individual composites unless a performance examination is also completed.
Summary
GIPS verification is an independent process that evaluates a firm's compliance with GIPS at the entity level, not at the product level. Verification increases confidence in the reliability, comparability, and transparency of reported results but does not guarantee the accuracy of specific composite returns. Compliant presentations are the primary vehicle for firms to communicate GIPS-adherent performance, and must be maintained for every composite. Independent verification is optional but valuable for both firms and clients.
Key Point Checklist
This article has covered the following key knowledge points:
- GIPS verification is a voluntary, independent review of firm-wide GIPS compliance by a third party
- Verification differs from performance examination, which focuses on a specific composite or pooled fund
- Compliant presentations must be prepared for all composites and relevant funds, meeting all GIPS requirements
- Only independent external parties may perform GIPS verification; internal staff cannot perform verification
- Firms must not represent individual composites as "GIPS verified" unless a performance examination has been completed
Key Terms and Concepts
- GIPS verification
- GIPS performance examination
- compliant presentation